Client Alert: Virginia Data Center Tax Reform – Key Implications for Real Estate Developers
Date: April 29, 2026
Executive Summary
Virginia’s 2026 General Assembly session produced significant new legislation reshaping the data center development landscape. Of 61 data center-related bills considered, 15 were sent to Governor Spanberger’s desk and 46 will carry over to 2027. The fate of the state’s marquee data center sales tax exemption remains unresolved. Lawmakers returned to Richmond on April 23 for a special budget session aimed at finalizing the state’s approximately $212 billion two-year spending plan, but the session lasted only a matter of hours before legislators recessed without reaching agreement, a result that laid bare significant rifts among the Democratic majorities. Members departed the Capitol without establishing a firm schedule for resuming negotiations, and the two chambers’ respective budget proposals remain separated by more than $1 billion. At a separate reconvened session on April 22, legislators also declined to adopt a number of the Governor’s proposed amendments to high-profile bills addressing energy policy, marijuana legalization and collective bargaining, further highlighting friction within Virginia’s newly unified Democratic government that could complicate fiscal talks going forward. The constitutional deadline for enacting a budget is June 30, and further negotiations are anticipated. This alert summarizes key legislative outcomes, pending measures and market dynamics that data center developers and operators should factor into their investment decisions.
The Shifting Regulatory Landscape
Virginia is home to the largest concentration of data centers in the world, with more than 200 facilities in Northern Virginia alone. However, the policy environment has shifted dramatically. Local opposition intensified throughout 2025, as communities raised concerns about noise, water consumption and rising energy costs. Facing a tight budget and growing constituent pressure, lawmakers advanced the most comprehensive set of data center regulations the state has ever considered.
The sales and use tax exemption for data center equipment has ballooned to an estimated $1.9 billion per year, making it the single largest tax incentive in Virginia. According to legislative estimates, qualifying facilities took advantage of more than $33.2 billion worth of tax-free equipment purchases in the most recent fiscal year. The exemption’s rapidly growing fiscal footprint has prompted the state to join a growing number of jurisdictions reconsidering similar tax breaks.
1. Tax Exemption: Unresolved but Imminent
The most consequential issue for developers was not resolved during the regular session or the April 23 special session. When the General Assembly ended its regular session on March 14, the budget remained unfinished, with the exemption at the center of the dispute between the two chambers. Legislators reconvened on April 23 but adjourned within hours, still unable to bridge the gap. On the eve of the session, Senate Finance and Appropriations Chair Louise Lucas captured the stalemate succinctly: “There’s no white smoke,” she said, borrowing the Vatican’s traditional signal for the selection of a new pope.
The two chambers have taken sharply different positions. The Senate, under the leadership of Lucas (D-Portsmouth), has proposed phasing out the exemption beginning January 1, 2027, eight years ahead of its current 2035 expiration, casting it as a matter of fiscal equity for Virginia families. Lucas originally sought the full $1.9 billion in annual revenue the industry would owe, though she has since reduced that figure to $1.6 billion. The Senate plan would also channel roughly $300 million toward transportation investments spanning multiple modes. The House, with Del. Luke Torian (D-Prince William) leading budget negotiations, has rejected the Senate’s approach. Torian has stressed the importance of honoring the state’s existing commitments to industry participants. “We’re ready, we’re just waiting to have some conversations with the Senate,” Torian said at the special session. “These things work themselves out once we get to have a conversation.” Governor Spanberger has similarly indicated that Virginia should stand behind promises already extended to businesses in the Commonwealth. House Minority Leader Terry Kilgore (R-Scott) reinforced that view: “We made promises to these data centers when they came here that ‘you’d have this tax credit,’ and we as Virginians need to fulfill our promises.” Potential compromise frameworks that have been floated include tying the exemption to clean energy commitments, imposing an energy consumption tax on high-demand users, or narrowing the categories of equipment that qualify for the sales and use tax exemptions, but none have gained traction to date.
Although the April 23 session ended without progress, the data center industry has publicly expressed a continued willingness to find common ground. Josh Levi, president of the Data Center Coalition, noted that the industry had put forward two separate revenue proposals, the more recent of which would generate $1.1 billion in new state revenue over the biennium, but that both were turned down. “The industry has yet to receive any substantive feedback or details about what a resolution might include,” Levi said. For their part, legislators have insisted that any deal must grapple with the industry’s broader footprint on state resources. “We want data centers here, we want more businesses here,” Sen. Lamont Bagby said on the Senate floor. “But they need to pay their fair share. We need to protect our water and protect our energy … but be fair about it.” Budget negotiations are further complicated by an approximately $250 million gap resulting from the Governor’s veto of skill games legislation, a shortfall that Del. Torian has said must also be addressed. In addition, the General Assembly’s rejection of Spanberger’s substitute retail marijuana bill at the April 22 reconvened session leaves the Governor to decide whether to sign, veto or allow the original legislation to take effect without her signature. A veto would remove projected cannabis tax revenue from the fiscal equation. Developers should continue to prepare for three possible outcomes: full elimination of the exemption, continuation with environmental conditions, or a yet-to-be-negotiated compromise. Unlike other bills carried over to 2027, this issue will be settled this year.
The two chambers have taken sharply different positions. The Senate, under the leadership of Lucas (D-Portsmouth), has proposed phasing out the exemption beginning January 1, 2027, eight years ahead of its current 2035 expiration, casting it as a matter of fiscal equity for Virginia families. Lucas originally sought the full $1.9 billion in annual revenue the industry would owe, though she has since reduced that figure to $1.6 billion. The Senate plan would also channel roughly $300 million toward transportation investments spanning multiple modes. The House, with Del. Luke Torian (D-Prince William) leading budget negotiations, has rejected the Senate’s approach. Torian has stressed the importance of honoring the state’s existing commitments to industry participants. “We’re ready, we’re just waiting to have some conversations with the Senate,” Torian said at the special session. “These things work themselves out once we get to have a conversation.” Governor Spanberger has similarly indicated that Virginia should stand behind promises already extended to businesses in the Commonwealth. House Minority Leader Terry Kilgore (R-Scott) reinforced that view: “We made promises to these data centers when they came here that ‘you’d have this tax credit,’ and we as Virginians need to fulfill our promises.” Potential compromise frameworks that have been floated include tying the exemption to clean energy commitments, imposing an energy consumption tax on high-demand users, or narrowing the categories of equipment that qualify for the sales and use tax exemptions, but none have gained traction to date.
Although the April 23 session ended without progress, the data center industry has publicly expressed a continued willingness to find common ground. Josh Levi, president of the Data Center Coalition, noted that the industry had put forward two separate revenue proposals, the more recent of which would generate $1.1 billion in new state revenue over the biennium, but that both were turned down. “The industry has yet to receive any substantive feedback or details about what a resolution might include,” Levi said. For their part, legislators have insisted that any deal must grapple with the industry’s broader footprint on state resources. “We want data centers here, we want more businesses here,” Sen. Lamont Bagby said on the Senate floor. “But they need to pay their fair share. We need to protect our water and protect our energy … but be fair about it.” Budget negotiations are further complicated by an approximately $250 million gap resulting from the Governor’s veto of skill games legislation, a shortfall that Del. Torian has said must also be addressed. In addition, the General Assembly’s rejection of Spanberger’s substitute retail marijuana bill at the April 22 reconvened session leaves the Governor to decide whether to sign, veto or allow the original legislation to take effect without her signature. A veto would remove projected cannabis tax revenue from the fiscal equation. Developers should continue to prepare for three possible outcomes: full elimination of the exemption, continuation with environmental conditions, or a yet-to-be-negotiated compromise. Unlike other bills carried over to 2027, this issue will be settled this year.
2. Enacted Legislation: What Passed
Energy Cost Allocation – Costs Shifting to Data Centers
Two significant energy bills will directly affect data center operating costs. Under HB 1393, Virginia’s principal electric utility must seek approval from the State Corporation Commission for new rate structures that allocate the costs of expanding generation capacity to customers with demand of 25 megawatts or more. Because the bill carves out manufacturing, industrial and warehousing operations with at least 200 employees, data centers will absorb a disproportionate share of these costs.
HB 284 requires two of the state’s electric utilities to develop voluntary demand flexibility programs for large-load customers by 2029 and bars those program costs from being shifted to other ratepayers. Together, these bills ensure that the infrastructure costs driven by data center growth are borne by the industry itself rather than by residential and small commercial customers.
At the April 22 reconvened session, the General Assembly adopted one of Governor Spanberger’s proposed amendments to the Fair and Affordable Electric Rates and Reliability Act. The accepted change broadens the bill’s original approach to data center cost allocation: rather than prescribing two specific mechanisms for shifting costs away from other utility customers, the revised language directs State Corporation Commission regulators to “take all reasonable measures” to prevent data center-driven expenses from being passed through to other ratepayers. Del. Destiny LeVere Bolling (D-Henrico) characterized the amendment as establishing “a permanent policy that the SCC is to ensure that data center customers have no adverse effects on rates of any other customers.” The legislature declined, however, to adopt the Governor’s other recommended changes to the bill, including proposals that would have expanded regulatory authority over Dominion Energy’s strategic undergrounding program and directed regulators to lower the utility’s profit margin. The original legislative language on those provisions will stand.
HB 284 requires two of the state’s electric utilities to develop voluntary demand flexibility programs for large-load customers by 2029 and bars those program costs from being shifted to other ratepayers. Together, these bills ensure that the infrastructure costs driven by data center growth are borne by the industry itself rather than by residential and small commercial customers.
At the April 22 reconvened session, the General Assembly adopted one of Governor Spanberger’s proposed amendments to the Fair and Affordable Electric Rates and Reliability Act. The accepted change broadens the bill’s original approach to data center cost allocation: rather than prescribing two specific mechanisms for shifting costs away from other utility customers, the revised language directs State Corporation Commission regulators to “take all reasonable measures” to prevent data center-driven expenses from being passed through to other ratepayers. Del. Destiny LeVere Bolling (D-Henrico) characterized the amendment as establishing “a permanent policy that the SCC is to ensure that data center customers have no adverse effects on rates of any other customers.” The legislature declined, however, to adopt the Governor’s other recommended changes to the bill, including proposals that would have expanded regulatory authority over Dominion Energy’s strategic undergrounding program and directed regulators to lower the utility’s profit margin. The original legislative language on those provisions will stand.
Siting Restrictions – New Permitting Requirements
HB 153 establishes a new permit process for “high energy use facilities” consuming 100 megawatts or more. Applicants seeking zoning approval must prepare site assessments that evaluate noise impacts on residences and schools within a 500-foot radius. Localities may also require analysis of effects on groundwater, surface water, agricultural land and historic sites, a provision widely understood as a response to a proposed facility near the Manassas National Battlefield Park.
This introduces a meaningful new layer of local review that developers will need to incorporate into project timelines and site selection.
This introduces a meaningful new layer of local review that developers will need to incorporate into project timelines and site selection.
Water Usage Transparency
Two enacted bills bring new transparency to data center water consumption. Under HB 496, water utilities must disclose the total volume of water delivered monthly to data center customers. SB 553 requires developers of proposed industrial facilities, including data centers, to provide annual water consumption projections as part of rezoning and special use permit applications. Together, these measures give localities substantially more data on water demands and may shape site selection in water-constrained areas.
3. Bills Carried Over to 2027
Several significant proposals will carry over to 2027. Developers should monitor these closely.
A. Backup Generator Standards
SB 336, which cleared the Senate, would task the SCC with assessing whether data centers should be required to phase out older Tier 2 generators in favor of cleaner Tier 4 models. HB 1502, which passed the House, calls for a year-long study of emissions from standby generators at commercial facilities. With roughly 9,000 backup generators currently operating at Virginia data centers, the outcome of these bills could carry substantial operational implications.
SB 336, which cleared the Senate, would task the SCC with assessing whether data centers should be required to phase out older Tier 2 generators in favor of cleaner Tier 4 models. HB 1502, which passed the House, calls for a year-long study of emissions from standby generators at commercial facilities. With roughly 9,000 backup generators currently operating at Virginia data centers, the outcome of these bills could carry substantial operational implications.
B. Cost Subsidy Investigation
SB 339, which passed the Senate, would require the SCC to investigate whether other ratepayers are effectively cross-subsidizing electric service for large-load customers such as data centers. Should this bill advance in 2027, it could trigger additional rate restrictions with direct implications on data center operating budgets.
C. Other Notable Bills That Did Not Advance
Several other high-profile proposals did not advance during the regular session, including HB 155 (pre-connection grid impact reviews for high-demand facilities) and HB 503 (prohibiting ratepayers from bearing data center transmission costs). These may resurface in future sessions.
4. Market Dynamics
A. Grid Constraints and Reliability Concerns
These legislative developments unfold against a backdrop of genuine grid reliability concerns. PJM Interconnection, the regional grid operator serving Virginia and 12 other states, faces growing pressure to accommodate surging data center demand while maintaining adequate generation reserves.
These grid constraints represent both a regulatory risk and a practical ceiling on near-term project feasibility for developers planning new facilities in the region.
These legislative developments unfold against a backdrop of genuine grid reliability concerns. PJM Interconnection, the regional grid operator serving Virginia and 12 other states, faces growing pressure to accommodate surging data center demand while maintaining adequate generation reserves.
These grid constraints represent both a regulatory risk and a practical ceiling on near-term project feasibility for developers planning new facilities in the region.
B. Supply Chain and Resource Competition
Beyond legislation, developers face significant market headwinds. According to a recent survey of data center industry participants, energy availability ranks as the single greatest development challenge for the remainder of the decade, and roughly two-thirds of respondents pointed to supply chain constraints as a top obstacle.
The competition for critical power infrastructure equipment is particularly intense, as utilities, independent power producers and data center developers all draw from the same limited pool of manufacturers. Turbine lead times now stretch into 2028 and 2029, and reservation slots with manufacturers have become sufficiently scarce to sustain an active secondary market.
Workforce constraints compound the problem. Where power generation and data center facilities are being developed on parallel timelines, both projects draw from the same limited construction labor pool. Industry participants anticipate a market correction by 2030, and a meaningful share views the current pace of development as unsustainable.
Practical Considerations for Developers
New Development Projects
- Developers planning new data center projects in Virginia should incorporate the following considerations into their strategy in light of the 2026 session’s outcomes:
- Siting and permitting. Projects consuming 100 megawatts or more now face a new permit process under HB 153, including mandatory sound assessments and potential requirements to evaluate impacts on water, agriculture and historic resources. Site selection should account for proximity to residences, schools and sensitive historic or environmental areas.
- Timeline planning. Project schedules should factor in the new siting requirements enacted this session, extended power delivery timelines and equipment lead times stretching into 2028-2029. Water consumption estimates will need to be prepared as part of rezoning and special use permit applications under SB 553.
- Tax exemption uncertainty. The special session’s adjournment without a resolution means the exemption’s future remains an open question, and legislators left the Capitol without a defined timeline for resuming talks. House Minority Leader Kilgore underscored the time pressure: “We only have until June 30, and unlike in the federal government, a lot of things start shutting down here in the commonwealth.” Developers should model project economics under multiple scenarios and be prepared to move quickly once the budget is finalized.
- Energy cost planning. Under HB 1393, facilities demanding 25 megawatts or more will bear the costs of increased generating capacity. The Governor’s accepted amendment to the Fair and Affordable Electric Rates and Reliability Act further entrenches this principle by directing the SCC to take all reasonable steps to insulate other ratepayers from data center-related costs. These developments should be factored into operating expense projections from the earliest stages of project planning.
- Equipment procurement. Early equipment reservations and creative sourcing strategies, including secondary market purchases and repurposed equipment, may be necessary to meet project schedules given industry-wide supply constraints.
- Power partnerships. Joint ventures with power developers or investments in generation capacity may provide advantages in securing equipment and EPC contractor access.
- Operators of existing data centers should prepare for several changes that are now enacted or likely:
- Cost allocation adjustments. HB 1393’s cost recovery provisions will result in increased charges for large customers. Operators should review their current energy contracts and budget for higher electricity costs.
- Backup power planning. While the most aggressive generator restriction bills were carried over to 2027, the legislative direction is clear. Operators should begin evaluating transitions from Tier 2 to Tier 4 generators and exploring battery storage alternatives in anticipation of future requirements.
- Tax exemption conditions. With the April 23 special session having ended without a budget agreement, the exemption’s status remains in flux. The ultimate resolution of ongoing negotiations will determine whether operators must meet clean energy procurement or efficiency benchmarks to maintain eligibility.
Looking Ahead
The 2026 session represents a watershed moment for data center regulation in Virginia. The enacted legislation, particularly HB 1393’s cost allocation, HB 153’s siting requirements and the water transparency measures, establishes a new regulatory baseline that developers must incorporate into planning immediately.
The most consequential decision remains outstanding. The April 23 special session failed to produce an agreement on the sales tax exemption, and the stakes for project economics statewide remain significant. The gulf between the Senate’s drive to end the incentive and the House’s preference for a conditional approach reflects the issue’s political complexity, now amplified by broader friction between the legislature and the Governor’s office, as evidenced by the Assembly’s refusal to accept Spanberger’s proposed changes to several major bills at the April 22 reconvened session. The impasse also carries implications beyond tax policy: Del. Rodney Willett (D-Henrico) has cautioned that prolonged budget uncertainty could jeopardize funding for programs serving millions of Virginians, noting that more than two million residents depend on state social services and roughly 33,000 have already lost insurance coverage amid rising premiums. Unresolved questions surrounding the retail marijuana bill and the skill games veto inject additional fiscal uncertainty. Sen. Scott Surovell has observed that Virginia’s handling of the exemption could “start the national discussion about what the proper policy is for data center sales tax exemptions,” suggesting ramifications well beyond the Commonwealth’s borders. Negotiations are expected to continue ahead of the June 30 budget deadline, but as Kilgore warned, Virginia’s balanced-budget requirement means that missing that date would have immediate operational consequences for state and local government.
Meanwhile, 46 bills carried over to 2027 signal that legislative scrutiny is far from over. Developers should expect continued regulatory evolution and plan accordingly.
For questions regarding these legislative proposals or their potential impact on your development plans, please contact our Real Estate and Tax practice groups.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.